I’ve by no means been accused of being hesitant to nitpick (and if anybody ever did make that accusation, I’d nitpick it aside!), however typically what looks like a nitpick is definitely an vital level. Economists usually make what looks like a nitpicky level to the non-economist. It often takes a type like this: “Really, Tesla’s current value reductions received’t improve the demand for Tesla automobiles – it should improve the amount demanded.” Or, we would say that the current spike in egg costs doesn’t cut back demand for eggs, it solely reduces the amount of eggs demanded. (Insert compulsory “all else being equal” clause right here, and please mentally carry it ahead for the rest of the publish! It should save me plenty of keystrokes.)
Will increase or decreases in demand imply the demand curve has shifted proper or left. The identical is true for modifications in provide. Will increase or decreases in amount demanded (or equipped) means shifting up (or down) the curve, with out shifting its place. We may additionally communicate of the change in elasticity of provide and demand, which modifications how steep the curves are, however for now we will ignore that complication. Let’s simply follow these two concepts – shifting the curves and shifting alongside the curves.
I’ve been instructed {that a} signal you’ve mastered studying a brand new language is once you expertise and perceive folks talking that language in your desires. I wouldn’t know – I lived in Japan for an prolonged interval, and I solely discovered to say about 4 phrases of Japanese that complete time. However in that spirit, an indication that you just’ve totally absorbed and understood the significance of this seemingly nitpicky distinction is that this – the phrase “constructing new homes doesn’t improve the housing provide” doesn’t sound even barely odd to you.
Let me attempt to unpack that. Demand, roughly, means how a lot we wish one thing. A spike in egg costs will lead folks to purchase fewer eggs, however that’s not fairly the identical as saying folks need eggs lower than they used to. It solely means persons are much less keen (or in a position) to purchase as many eggs on the present value in comparison with earlier than. Their demand for eggs hasn’t modified, however the amount demanded has. The demand curve stays unmoved. Demand will increase (or decreases) once we need one thing extra (or much less).
Provide, roughly, means the capability to provide one thing. Sticking with the instance of eggs for now, a wave of avian flu has decreased egg manufacturing capability – the availability curve has shifted to the left, reflecting the lowered capability. If demand for eggs have been to sharply lower, that’s, if folks have been to seek out eggs much less fascinating than earlier than, maybe as a consequence of sudden widespread well being considerations about eggs or elevated adoption of plant-based diets, the demand curve would shift left and the equilibrium value would fall, however the provide curve would keep put. If this occurs, the amount of eggs equipped would additionally drop, however the provide curve would keep put. The capability for egg manufacturing wouldn’t have modified, however suppliers aren’t keen to provide as many eggs on the new lower cost.
This fundamental thought results in a typical confusion I see from NIMBYs concerning the results of constructing new housing. Growing the availability requires shifting the availability curve – or, in different phrases, growing our capability to construct new housing. That’s not the identical as merely constructing extra housing in and of itself.
Think about a spot the place, as a consequence of tight laws, the provide of housing is fastened. Your first impulse is likely to be to assume this implies no new housing may be constructed, however that’s not fairly proper. It simply implies that the availability curve can’t shift. With a set provide curve, the amount equipped can nonetheless improve. When the demand curve shifts additional to the best and the availability curve stays fastened, amount equipped can improve – however the equilibrium value will improve together with it. Which means that in locations the place the availability curve is so tightly constrained as to be successfully fastened, new homes will solely be constructed solely when demanded by folks keen and in a position to pay prime greenback for them – that’s, the wealthy. Which means that regardless of new housing being constructed, the availability of housing hasn’t elevated.
For this place to extend the housing provide, versus merely growing the amount of housing equipped, the housing market would have to be deregulated in a approach that will increase the capability to construct housing above what it was earlier than. This could take the type of eradicating restrictions on multifamily items or limits on how tall condominium buildings may be, or eliminating minimal lot sizes, or streamlining a laborious and costly approval course of to construct housing. If these sorts of measures have been to be taken, then we will say that the housing provide has elevated even previous to any new building.
Lacking this seemingly nitpicky distinction is the supply of the frequent confusion amongst most of the NIMBY varieties I discussed earlier than. They may see a spot the place housing is dear (as a consequence of restricted provide), however additionally they discover that new housing remains to be being constructed. However this new housing, removed from making housing extra reasonably priced, is nearly completely costly housing, solely reasonably priced by the wealthy. This, of their thoughts, undercuts the argument that growing the housing provide will decrease housing costs – as a result of they don’t comprehend the distinction between “growing the housing provide” and merely “constructing extra housing” – that’s, the distinction between a rise in provide and a rise within the amount equipped.
Kevin Corcoran is a Marine Corps veteran and a guide in healthcare economics and analytics and holds a Bachelor of Science in Economics from George Mason College.
